Kuflink Enacts Changes In Response To Auditor Concerns On Governance

See the latest update on the subject below in Update On Kuflink's Financial Results And Auditor Reports.

Let's catch up on 3/3 4thWay PLUS-Rated P2P lending company Kuflink* – which has had a stern ticking off from its former auditors, Ernst & Young, who resigned. Here are the key points:

• Kuflink's former auditors found that for the most part the accounts give a true and fair view of Kuflink's position and had been prepared properly.
• Most importantly, Ernst & Young reported no issues related to loans on the platform or regarding cash in Kuflink's account or lenders' segregated client bank account.
• The former auditors were critical in general about governance practices as well as about accounting, specifically on VAT accounting. These items should have been ticked off and running like clockwork for a business of Kuflink's size.
• In fairness to Kuflink, its VAT obligations aren't the simplest, since its primary business activity is not VATable. That slightly offsets its mistake. Even Ernst & Young failed to notice that Kuflink should be collecting and paying some VAT for about a year, according to Kuflink.
• The VAT amount due has subsequently been identified as £160,000, which is less than the approx £500,000 contingency that Kuflink had provided for.
• 4thWay doesn't have a full list of all the issues that Ernst & Young brought up, but Kuflink's new auditors, MHA MacIntyre Hudson (a highly respectable and solvent accountancy firm) does have the list. The Financial Conduct Authority also has a copy. Kuflink has been working through the required improvements. MHA MacIntyre Hudson also had a call with Ernst & Young before signing up.
• As a result of the auditor's work last year, Kuflink now has four committees for which 4thWay has seen how they are constituted: a compliance sub-committee, a remuneration sub-committee, a nomination and related party sub-committee and an audit and risk sub-committee. Kuflink has had these formally in place now since 2020.
• While the auditors were working, Kuflink was building new loan-management systems, now completed, that deal with all of the auditor's recommendations in this area.
• Because an article in The Times covered this Kuflink-auditor story, the FCA requested that Kuflink report to it for a week on investor withdrawals, just to track whether there was a rush for the exit. Kuflink tells us that lender cash withdrawals have been normal. Also, on the day of The Times article and over the following nine days, no more than eight lenders listed a total of £35,000 to be sold early through its its secondary market.
• Kuflink is dealing with the matters openly and head on, getting in touch with 4thWay, its investors, its platform lenders and all important parties proactively. It has answered a lot of questions from 4thWay and is gathering materials to answer our remaining questions.
• Kuflink tells us that overall lenders are happy with how Kuflink has reacted.
• Kuflink's CEO says he has spoken to its own investors (i.e. those investing in Kuflink the business, not buying loans through its online platform) and they are reassured.
• We at 4thWay feel that Kuflink is taking this seriously enough and is being transparent.
• Kuflink states that the business is in a profit for the 2021 calendar year-to-date after big cost-cutting efforts, which meets its forecasts in its 2019 accounts. Its CEO expects a full-year profit for the current year.
• Its last company accounts for 2019 were filed, but they were nearly a year late, because they were under audit. Kuflink blames roughly half of the delay on auditor mistakes.
• Its 2020 accounts are also about one month late. Kuflink says the new auditors will be finished soon and the new accounts will be done and dusted by around the end of May 2021. They will show a loss of around £500,000 for the group, which is considerably lower than the previous year. Kuflink's CEO says these audited accounts will “speak for themselves”. (Update on 8/9/2021: the loss was actually for half this amount and the group is reaching closer to profitability. But the audited accounts – which we have seen – were delayed further and will be published within days. Kuflink's P2P lending subsidiary actually made a small profit, although we think the group accounts are even more important. We'll update the Kuflink Review this month with more information after we have digested all Kuflink group companies' published accounts in full.) 
• Kuflink most recently filed accounts were prepared as a going concern, meaning a business that is above water and likely to keep going. In these accounts, Ernst & Young recognised that it couldn't be confident that Kuflink is a going concern, because Kuflink still relies on getting funding from investors until it becomes profitable. However, that is the case for all startups, and for most P2P lending companies today, and I've seen no details from the auditors that make Kuflink particularly unique in this regard. It's not clear how much additional investor cash is strictly necessary, if Kuflink makes it into stable profitability in the near future.
• Detailed loan book data provided regularly to 4thWay shows that Kuflink continues to provide quality lending opportunities, with excellent results so far.
• A key aspect of property lending is the speed and effectiveness of reacting to borrowers who don't repay on time. Kuflink has built a good record here and the CEO claims its recovery processes are very good. “We demonstrated we do more than EY wanted [in this regard].”

A few thoughts from Neil Faulkner, head of research

Kuflink's auditors transferred the account from a local branch of Ernst & Young to its Canary Wharf branch, which is more suited to auditing the accounts of banks and other businesses that conduct activities like banks. This branch presumably sets extra high standards as a consequence of dealing with the major banks, and it's not surprising that it considers a much smaller business's governance to be less-well constructed.

Yet I expect better from P2P companies of this size, and of its executive, in getting the legal, accounting and corporate aspects right. I also expect better from the two officers listed at Companies House as independent non-executive directors in holding it to account.

Kuflink has given itself an unnecessary headache and potentially caused itself a little reputational damage, although apparently no harm to its business, since lenders are satisfied to keep lending.

When investors select investments – including P2P accounts – there's always something of a checklist that you need to go through, listing the pluses and minuses, before deciding whether to commit any money. Even the best P2P lending companies have some ticks in some of the minus boxes. This is a new minus tick for Kuflink. It will need to keep working to move this tick to the plus side by showing highly effective processes, governance, accurate accounts that no longer need to be dramatically restated every year, and timely filing of company accounts.

Everything I've learned over more than 20 years of investing and of investment analysis has told me that slow research and contemplation beats a knee-jerk reaction to one news item. 4thWay has taken about a week to get as familiar with Kuflink's mistakes as possible and will continue to seek answers to our remaining questions, but, so far, I see the case for lending through Kuflink remains virtually unchanged.

See the latest update on the subject below in Update On Kuflink's Financial Results And Auditor Reports.

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Kuflink Review.

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